Jun 16, 2011|
RBI policy warns of amplified global risks
The Indian central bank declared its second monetary policy for the financial year 2011-12 today. Skyrocketing commodity prices and inflationary pressure forced the RBI to tighten its monetary policy stance once again. The RBI continued its rampage against the persistent inflation by resorting to interest rate hikes for the 10th time in 15 months.
The interest rate at which the RBI lends to (repo rate) banks was raised by 0.25%. Thus the repo rate now stands at 7.5% from 7.25% previously. The rate at which RBI borrows from banks (reverse repo), has been pegged at 1% below the repo rate. Thus, the reverse repo rate has automatically adjusted to stand at 6.5% from 6.25% previously.
The increase in the price of commodities globally was cited as the ‘key risk factor' troubling the RBI. A slowdown in the pace of global growth is as much worrying. Uncertainty about the resolution of the Euro debt crisis has already spooked equity markets several times. Economies have been reeling under the pressure of high crude oil prices as well as other commodities. Now despite slower GDP growth prospects and lower consumption levels, commodity prices are still far from being at comfortable levels. Higher domestic demand, and increased input costs, has led to inflation in emerging economies to consistently be on the rise. Tighter monetary policies in Asian economies, particularly India and China, are yet to yield the desired results.
Is growth slowing down?
Growth in India's Gross Domestic Product (GDP) saw a slowdown to 7.8% in the fourth quarter of the financial year 2010-11 (4QFY11) from 8.3% in the previous quarter. The GDP growth had come in at a higher level of 9.4% in 4QFY10 before the rate hikes started. The RBI's latest round of liquidity tightening therefore begets the question as to whether India is headed towards a recession?
A recession is a period of a temporary decline in economic activity and consumption. Trade and industrial activity see a slowdown. It is usually identified by a fall in GDP for two quarters, back to back.
Interest rate sensitive sectors such as automobiles, housing etc. are witnessing a visible slowdown. Index of Industrial Production (IIP) numbers also saw a decline in April 2011. Credit growth for banks has seen some moderation. As companies deferred their capex plans, credit growth slowed down from 21.3% YoY in March 2011 to 20.6% YoY by early June 2011. However, this is still higher than the RBI's projection of 19% growth for the fiscal. 47 banks raised their base lending rates by 1.5-3% from July 2010-May 2011, in line with the RBI's aggressive stance. Bank funding is a major fuel to the economy. Now, with higher borrowing costs, not only can demand for credit moderate but also have a cascading effect on other growth aspects of the economy like consumption and investment.
Inflationary pressure may continue to plague the Indian economy in the near term. While supply of food products may get eased with good monsoon, the non agricultural commodities may remain a cause for concern. Inefficient supply chain and pricing mechanisms may also hurt consumer inflation. This indicates that rising input costs and higher wage levels could be passed on by producers. With little option to rein in price levels that can lead to real growth rates remaining in the negative, the RBI may not stop tweaking its monetary tools whenever necessary. However, the RBI will be looking closely at global developments and try and balance its anti-inflationary stance accordingly. Either way, things do not look too rosy for the economy at this point.
More Views on News
Jul 25, 2017
Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?
May 27, 2017
What happens when minority shareholders are short-changed in the normal course of business?
Feb 15, 2017
PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.
Aug 24, 2016
And here's your chance to claim a free copy of this book...
Aug 12, 2016
And Why India's demographic dividend could turn out to be a doubtful debt...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407